We did
this study at the request of a client on 5th November, 1997, at the height of the Asian
crisis. The Rupee was trading around 36.35 after having seen a sharp fall from 35.70 to
36.70 since August. There was general sense of dismay. The client wanted to know whether
there was any credence to the calls for a Devaluation of the Rupee in light of the Asian
crisis.

The study tried to take an objective look at the External Sector indicators for India
and how they fared in comparison to countries in South East Asia and East Europe. We found
that India's External Sector indicators were stable and well within comfort zone,
especially when compared the other countries.

In our opinion, India's external sector position was not a reason for devaluing the
Rupee. At the same time we acknowledged that these numbers would deteriorate over the
years and projected that the Rupee could come under severe pressure around 1999-2000.

Macro External Sector Comparisons - India looks OK (for
now)

Countries

GDP ($ Billion)

CAD as % of GDP

CAD ($ Billion)

Reserves ($ Billion)

Import Cover (Months)

Budget Deficit as % of GDP

M3 % rise over past 12
months

Short Term FX Debt to
Total FX Debt (%)

Total Forex Debt ($ bn)

Debt Service Ratio (%)

Poland

82.14

5.6

-4.6

19.80

4.4

-3.0

28.0

Czech Rep.

51.02

9.8

-5.0

10.80

3.8

-2.0

8.0

Slovakia

10.4

2.7

-4.6

14.0

Hungary

28.57

4.2

-1.2

8.30

5.6

-5.1

26.0

Estonia

13.7

1.8

-1.0

61.0

Latvia

9.5

2.8

0.1

38.0

Lithuania

9.0

1.6

-1.9

29.0

Ukraine

3.3

1.0

-6.1

36.0

India

371.43

1.4

-5.2

28.00

7.5

-5.0

16.0

7.37

90

25.6

(KCS
estimate)

(KCS estimate)

(KCS estimate)

(KCS estimate)

Malaysia

80.00

5.5

-4.4

26.60

3.6

0.9

21.0

21.2

30

7.7

Indonesia

197.50

4.0

-7.9

20.30

5.2

-0.3

27.7

20.7

110

30

Philippines

92.68

4.1

-3.8

8.30

2.3

0.5

24.2

13.4

40

14.5

Thailand

125.00

8.0

-10.0

28.60

6.1

3.0

14.0

32.2

86

15.6

Hong Kong

520.00

0.5

-2.6

85.30

3.9

24.7

Nil

Nil

Nil

South Korea

1140.00

2.0

-22.8

3.00

0.0

0.5

14.5

70

115

6.8

China

799.20

0.3

7.2

132.30

12.0

Mexico, 1994

7.0

0.8

-0.3

36.0

33.9

Thailand, 1996

8.0

5.5

2.3

13.0

Sources:

All figures for East European countries are from "The Economist"

Figures for East Asian countries are from the October 1997 issue of Bank of America's
"Asian Financial Outlook" and from Morgan Stanley's "Global Economic
Forum", Hongkong Bank, Citibank NA, IMF and World Bank

Figures for India are derived from RBI sources and newspaper reports

Observations:

The ASEAN countries (Malaysia, Indonesia, Phillippines and Thailand) have been running
large CADs (In excess of 4% of GDP), M3 growth in excess of 20% and have a very high
proportion of Short Term FX Debt, the perfect recipe for disaster

The CAD (as % of GDP) and M3 growth figures for East Europe are horrendous, even by
ASEAN standards

In the case of India:

The Current Account Deficit and ratio of Short Term FX Debt to Total FX Debt are both at
very manageable levels

However, these are STOCK figures, and do not represent FLOWS

It is our estimate that the ratio of Short Term FX Debt to Total Debt has risen to 9.6%
in 1997-98 from 3.9% in 1993-94

We would reckon that a sizeable amount of Private Sector ECBs would be bunched for
repayment in the period 1999-2001

Also, we expect the Trade Deficit (not shown above) to more than double from the 1997-98
level of about $ 13 billion to about $ 28 billion by 1999-2000 (assuming Export growth of
5% p.a. And Import growth of 20% p.a.)

Even if we expect continued healthy Private Transfers into India (averaging $ 15 billion
p.a.) upto 1999-2000, we would still be looking at a CAD level of about $ 13 billion, an
estimated 3% of 1999-2000 GDP, approaching Danger levels

The FX Reserves can be expected to grow more slowly and be at a level of around $ 37
billion in 1999-2000

As such, the "Months of Import" figure can be expected to come down to around
6.35, from the present 7.5

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